Petrus Potgieter: The high cost of saving ferrochrome

Key topics:SA ferrochrome smelters struggle due to high electricity costs vs China.Government plans R5.2bn subsidy to cut smelter electricity prices.State interventions include export controls and competition law exemptions..Sign up for your early morning brew of the BizNews Insider to keep you up to speed with the content that matters. The newsletter will land in your inbox at 5:30am weekdays. Register here.Support South Africa’s bastion of independent journalism, offering balanced insights on investments, business, and the political economy, by joining BizNews Premium. Register here.If you prefer WhatsApp for updates, sign up for the BizNews channel here..By Petrus Potgieter*.Minister Ramokgopa was in Davos last month, discussing the issues in the South African ferrochrome industry with industry notables. The industry has real problems despite an increase in worldwide demand for the alloy. Ferrochrome is essential in the manufacture of stainless steel and South Africa not only has large deposits of the chromite ore needed to produce it but has traditionally been the principal source of the most suitable quality (low carbon “charge chrome”) of the alloy for world industry from its smelters. While SA remains a major producer of chromite ore, a large part of which must be exported through Maputo due to the lack of capacity in SA ports, Chinese smelters are now the biggest producers of ferrochrome in the world.Many domestic ferrochrome smelters are now unable to operate profitably since electricity (the biggest cost of production) is so much more expensive in SA than in China. Eskom and the Department of Mineral Resources and Energy have now inked a deal with producers Samancor and Glencore-Merafe to cut the price of electricity supplied to 10 of their smelters from R1,35 to R0,62 per kilowatt-hour. The municipality charges me R4,45 for the same, but it is usual for large consumers to have preferential rates in turn for uptake agreements and other special arrangements. However, the price of R0,62 is so low that Eskom requires a subsidy or R5.2 billion from the government. According to Minister Ramokgopa, “we will find it”. Similar deals are already in place in SA. South32’s aluminium smelters are reported to pay so little for electricity that a substantial explicit (or implicit, since government will finally stand in for Eskom’s debt and losses) state subsidy must be assumed..Read more:.Miningweb: Power crunch forces Glencore to close two South African smelters.Even Australia, which is often thought to have a minerals and mining industry uncontaminated by state intervention, most recently threw a deal for subsidised electricity at Rio Tinto’s Tomago smelter in December. This follows similar arrangements of smelters operated by Glencore and Trafigura. The excuse there is that renewable energy (essential for “saving the planet”) is driving up the price of electricity and that certain industries merit saving because they are so critical. This is not however much more convincing than the “Eskom is bad” explanation in SA.While the problems of the ferrochrome industry are real, this and any other kind of state subsidy is an intervention in the economy that denies the basic tenet of a market-oriented economy: that the price/profit mechanism works and in the long run ensures the most productive allocation of resources. When Minister Ramokgopa determined that ferrochrome production merits saving by way of a subsidy, did he perhaps consider whether the money could not be better spent saving some other industry? Supermarkets buckle under the cost of running generators when the power goes out. Families sit in the cold and cook on paraffin because the price of electricity is too high. Can any of them expect a subsidy soon?Consultants have surely written many reports explaining the wider impact of the smelters on the economy without explaining why this impact is more valuable than that of other businesses. If 10 smelters with subsidised electricity are so important, has the minister considered subsidising the building of more? If 10 are so beneficial, surely 100 would be even better? Although the minister is still looking for it, we know where the R5.2 billion for ferrochrome electricity subsidies will come from: the taxpayers i.e. individuals and profitable businesses. As Henry Hazlitt, author of “Economics in One Lesson”, explained:“When the government makes loans or subsidies to businesses, what it does is to tax successful private businesses in order to support unsuccessful private businesses.”Adverse effects of the electricity subsidy also include a disincentive for the smelters to invest in less electricity intensive methods of ferrochrome production that, incidentally, are more environmentally friendly. There are also benefits to letting the smelters close, among other a slight reduction in the amount of noxious black dust settling on Middelburg (MP) from the Samancor smelter there..Read more:.South Africa powers up: New electricity market set to boost choice and cut costs.SA state intervention in the ferrochrome sector does not end with electricity subsidies. Cabinet approved export controls on chrome ore in 2025, requiring permits and approving imposing an export tax (“Trumping” ourselves). In Zimbabwe, the export control regime for chrome has been bypassed by multiple trucks using the same permit and it does not require a lot of imagination to suppose the same could happen on the way from SA to Maputo. Further support for the industry was applied in 2023 through broad exemptions for energy-intensive business from certain stipulations in competition law that prohibit collusive practices such as joint bargaining with suppliers. These exemptions were extended in January to any “industry in distress” and since it is hard to point to an industry not in difficulties in SA, one wonders whether an across-the-board pruning of the Competition Act would not have been simpler and more transparent..*Professor Petrus Potgieter, Department of Decision Sciences, Unisa, is an Associate of the Free Market Foundation. He writes in his personal capacity.

Petrus Potgieter: The high cost of saving ferrochrome

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